Five big threats to UK tax revenues

Brexit is likely to dominate the news in the coming years. In its inaugural fiscal risks report, the Office for Budget Responsibility (OBR) identified 57 issues for the Government to chew over when examining threats to revenues and expenditure.

Many of them pose risks to the economy regardless of the UK’s position in the EU. Here are five areas of concern:

Protecting the City

The OBR described the UK’s financial sector as “tax-rich”. In other words: hit the City, and you’ll hit the wider economy. It said the financial sector contributed much more to the public finances than its 7pc contribution to national output suggested.

While the sector accounts for just 3pc of total jobs, many of them are high-paid, taking the share of payroll income tax and national insurance receipts paid by these bankers, analysts and financiers to 12pc.

Brexit-related risks to the financial sector would have a greater effect on income tax receipts than in other sectors due to the high concentration of top earners in that sectorOBR

The financial sector also contributes a “disproportionately large share of corporate taxes”, the OBR said, including 17pc of onshore corporation tax. The bank levy, introduced by George Osborne, raised £12.7bn in 2016-17, though receipts from this levy are expected to decline in future as the rate is cut.

It said: “Brexit-related risks to the financial sector would have a greater effect on income tax receipts than in other sectors due to the high concentration of top earners in that sector. And greater concentration of the tax base means receipts would be even more sensitive to such a shock than they were a decade ago.”

Being your own boss

Self-employment has risen sharply since the financial crisis, accounting for around 45pc of total employment growth, according to official figures.

The OBR expects this to continue in the coming years, rising from 15pc of employment to 15.7pc by 2021-22.

The number of people opening their own business and incorporating is also expected to keep rising. The OBR expects incorporations to rise 4pc a year until 2021-22, outpacing average annual employment growth of 0.3pc a year.

This compares with 24.5pc for a self-employed person and 19.7pc for a company owner manager. Robert Chote, the chairman of the fiscal watchdog, said: “We assume that continued rises in the self-employment and incorporation shares will reduce receipts by around £4.5bn by 2021-22, but the figure could easily be bigger if these trends accelerate.”

Matthew Taylor, the architect of Theresa May’s employment review, has called on the Government to tax labour in a fairer way, suggesting companies that hire self-employed workers should pay NI contributions, as they already do for employees.

Fuel duty

As cars become more efficient, this is expected to reduce tax revenues. Fuel duty is the sixth biggest revenue raiser for the Treasury, so long-term declines in the tax base pose a fiscal risk.

Mr Chote also said policymakers’ decision to keep freezing fuel duty has also cost the Exchequer. “Since fuel duty was cut in Budget 2011, the default policy – to raise it in line with inflation – has been delayed three times, cancelled six times and has never actually been implemented, at a cost of around £8.5bn by 2017-18,” he said.

Stamp duty

The OBR expects revenues from stamp duty to rise to £13.1bn this year. Its tiered nature means buyers of more expensive properties pay more tax, with receipts concentrated at the top end.

It said 9,250 residential transactions in Westminster, Kensington and Chelsea accounted for just 0.8pc of total sales in 2015-16.

However, they also accounted for £1bn in stamp duty land tax, or 14pc of total receipts. The watchdog said a 10pc fall in prime property prices would cut residential stamp duty receipts by 6.3pc.

It also said another financial crisis would hit stamp duty land tax receipts hardest, with revenues falling to just 20pc of its baseline forecast in March. Receipts would drop to around £3bn from 2018-19 onwards, it said.

Brexit ‘divorce bill’

The OBR said a bill of €75bn (£66bn), or around 3pc of GDP, was unlikely to pose a serious threat to the public finances. “As a one-off hit, this would not be a serious threat to fiscal sustainability.

More important is whether deals with the EU and other trading partners are good for the long-term growth potential of the economy or not, it said.